Japan cuts pensions in line with falling prices
By David Pilling in Tokyo
Published: February 7 2003 17:47 | Last Updated: February 7 2003 17:47
Japan's retired population will for the first time suffer the consequences of deflation when the government cuts the monthly pension by 0.9 per cent in line with the falling consumer price index.
Until now, retired people in Japan have been largely shielded from the effects of deflation, since a political decision to decouple their benefits from the CPI when prices began to fall three years ago. Most retired people, few of whom are exposed directly to the stock market, have benefited from deflation, which has boosted their real spending power.
The government's decision to make pensioners share some of the burden amid a stagnating economy and sharply worsening demographics is highly symbolic. It could well presage aggressive moves to renege substantially on promised pension benefits, analysts said.
On Friday, the cabinet re-established the link between prices and pensions, which were first indexed in 1973. As a result, the state pension for an average head of household will be cut by ¥2,140 ($18, €17, £11) to ¥235,980 a month.
The move could change the psychology of deflation, Jeffrey Young, senior economist at Nikko Salomon Smith Barney, said. "The relinking of benefit back to the CPI may start to convince seniors that deflation is not the greatest thing in the world," he said. "This is the first time that, in a very direct and visible fashion, they can see: 'Oh, falling prices means my income is going to be cut as well'."
Explaining the change of policy, a government official said it was necessary to prevent the deterioration of the social security system's finances. The system fell into deficit for the first time last year, a situation that will get significantly worse. The labour force is shrinking by 0.6 per cent each year as baby boomers retire, reducing the size of total premiums and raising the amount that must be paid out in pensions.
According to Masaaki Kanno, chief economist at JP Morgan in Tokyo, the deficit in the state pension fund will rise from ¥800bn last year to ¥3,300bn in fiscal 2003.
"Last year, the wages of the working population also went down," said the government official. "Since the premiums are paid from their wages, if we keep the amount of pension benefit at the same level, the pension budget would get worse and worse."
Mr Young said the change might cause less political backlash than it would in Europe or the US. "Maybe there's a greater sense of realism that the long-term solvency of the system is an important thing and that high current benefits - if they are perceived to jeopardise solvency - should be reduced."
Mr Kanno said that pensions would still rise in real terms because the CPI underestimated the real rate of inflation as measured by the GDP deflator. Last year, this was minus 1.5 per cent.
"Theoretically, they will still get some benefit from falling prices, although they might not understand that," he said. Japan's current crop of pensioners had few debts and, as a group, still felt well off, he said.
news.ft.com |
